20th June 2016 at 11:20am
Is there a magic number when it comes to the savings you’ll require to fund this new sense of purpose?
Unfortunately not. Realistically, the amount we need depends on what we want from a life after work. It’s very personal.
To come up with your magic number, you’re going to need a pretty good idea about what kind of life you want, and how much you’ll need to pay for it.
Rule of thumb
Government appointed experts have calculated that the typical worker needs an income equivalent to about two-thirds of their final salary to maintain their lifestyle once they stop work. However, some may manage with less, while others will want more.
While these rules of thumb can be helpful in bringing attention to retirement savings, the target cannot be based on accumulating a set amount of money, on a specific date. With volatile markets and investment fluctuations that’s just not realistic or doable. It’s a decision that should be personalized because everyone is different. The focus should be around an individual’s unique goals, needs, appetite for risk, and income sources in retirement.
2/3 of your final salary to maintain current lifestyle. Source: Telegraph
So how do we do this?
In order to figure out how much you need to embark on this personal journey, a good first step is to try and visualize the life you want to lead and then come up with realistic expenses to cover it. Once you have a rough estimate on your expenses, you can then start figuring out how much income you might require.
By focusing on your current spending, then and only then can you make a projection as to approximately how much you are going to be spending each year.
A three step approach
There’s a quick three step process you can follow that can help. It involves estimating your future living expenses, tallying up your retirement income and calculating the difference.
Track your current living expenses and deduct any costs you expect to go away or decline when you retire, and add whatever new ones you anticipate.
Things to deduct could include work-related expenses, commuting, lunches even up to the big ticket items like mortgage (if you plan to have it paid off) and what you’re currently paying towards retirement. And don’t forget, income taxes could be less.
You need to also factor in costs that might go up, like insurances, leisure activities (you might take up hobbies or travel). And with life expectancy increasing, you’ll need to try and factor in how long you could potentially spend into retirement. If it’s 20 or 30 years, you’ll need to prepare for the unexpected or bigger budget items like a new car.
For more information on what the average person needs in retirement take a look at this ‘How much will you need to retire’ guide by Which.co.uk
The next thing you need to do is to calculate your retirement income. Now you can get a forecast of how much you could get when you reach State Pension age from GOV.UK. This new service is currently in ‘beta’ – it’s being tested and improved, but it is up and running.
In addition to State Pension, check any pension plans you have in place and find out from the plan provider how much you are likely to get when you retire. And, figure in any other income from other sources you expect to have, such as rental properties, part-time work, etc.
Calculate the difference
The final step is to do the math. Subtract your annual living expenses from your annual retirement income. If your income alone can cover your bills, you’re on track. If not, you’ll need to start looking at how you could help make up the difference.
Help with your homework
It really can be this simple, but if you need help there are a host of retirement calculators out there to assist you, including our retirement lifestyle calculator.
Retirement calculators make the math of long-term financial modelling easy. You can put real numbers behind your future plans and decide both how much money you need to retire and if you are saving enough to reach that goal.
There’s no easy answer
While rules of thumb can be a helpful talking point, they should not be relied upon in your individual situation.
The only way to get a good answer for these major retirement decisions is to establish what you want from your retirement.
Everyone is different, and it isn’t a case of one size fits all. But hopefully our hints and tips will help you get well on your way to figuring out how much you’ll need to fork out when the time comes.
The information in this blog or any response to comments should not be regarded as financial advice. A personal pension is an investment and its value can go up or down and may be worth less than you paid in.